About the Author

James L. Koch holds the Bill and Jan Terry Chair in Management at Santa Clara University. He is the founding director of the Center for Science, Technology, and Society and the Director of the Global Social Benefit Incubator. At Santa Clara University he also has served as interim Dean of the School of Engineering and Dean of the Leavey School of Business. Jim is an editorial board member for Health Management Review and a Trustee of Bay Area Council Economic Institute. From 2001 to 2007 he served as chair of the judging panels for The Tech Museum Awards: Technology Benefiting Humanity. His research interests include social capital, community, and issues of scaling and sustainability for social enterprises in developing countries. He holds an MBA and Ph.D from the University of California at Los Angeles.

Democratizing Capitalism

James L. Koch

In receiving the 2006 Global Humanitarian Award at The Tech Awards, Bill Gates gave a moving speech on the potential for creative capitalism to address the urgent social and environmental needs of our time. Gates recently expanded on his thinking about creative capitalism as a potential force for good in the July 31, 2008 issue of Time Magazine. In this article, he argues that capitalism has left out billions of people who are trapped by poverty and without a voice in shaping the innovations that are needed to eliminate preventable disease, improve literacy and the productive outcomes of their labor, and connect them with the information and knowledge resources of our networked world. Previous Tech Awards Laureates that have gone on to attend the Global Social Benefit Incubator (GSBI) at Santa Clara University have learned that technological innovation in combination with imaginative business models can overcome market failures. This article will examine the work of this year’s Tech Laureates and how insights from the GSBI capacity building program might help to scale such innovations. Capitalism as we know it today must be democratized if it is to work in a manner that serves the interest of all of humanity. This will entail giving a voice to the voiceless so that the needs of the poor are recognized and catalyze market innovation as opposed to these needs being seen as the afterthoughts of a free market system and addressable only by government welfare or charity. Democratizing capitalism also entails attention to intergenerational ethics and the need to give voice to future generations so that the environmental externalities that erode the sustainability of our planet are seen as variances to be controlled today as opposed to being passed on to those unborn. In an ideal world, collective conscience and aligned financial incentives would ensure that this happens. The Gates call for creative capitalism suggests that the gaps in Figure 1 must be addressed if market failures are to be overcome.

REFRAMING MARKET FAILURES AS OPPORTUNITIES

Market Ignorance. The poorest two-thirds of the world’s population represent a market of about $5 trillion, but they are largely without a “voice” in today’s global economy. As Gates argues, beyond aid and humanitarian relief we have spent little time trying to understand these markets.

Inequity as a Business Problem. Gates cites innovations in the use of cell phones with visual interfaces and value added services including banking and access to market-related agricultural information as examples of innovations tailored to the poor. Unfortunately, these examples are exceptions to the rule and corporate innovation is seldom tailored to the very poor. However, inequity can be seen as a business problem to be addressed by rethinking the design of technology solutions and business models.

Pricing and Distribution. Economies of scale can dramatically lower production costs. In fact, in some sectors (e.g., software and pharmaceuticals) high volumes yield incremental production costs of near zero. With proper attention to distribution, the pricing flexibility permitted by economies of scale can provide wide latitude for the development of incentive-based supply chains with tiered pricing structures to meet the affordability requirements of the poor in highly fragmented markets.

Linking Corporate Social Responsibility to Branding. Gates suggests that measurement, transparency, and communication can be used to strengthen the connection between the social and environmental outputs of business and brand identity, or reputation assets that are valued in markets.

Government as an “Economic Buyer” of Cost-Effective Social Benefit Solutions. Governments can create market incentives to foster innovation and partner with social entrepreneurs with the most cost effective solutions for delivering vital services. Cross-sector collaborations create opportunities to leverage the creative solutions of social entrepreneurs.

Removing Innovation Barriers. The rule of law, property rights, licensing regimes, capital access, and business formation rules are all mechanisms that can hinder innovation or foster its growth and diffusion. Public policy should be viewed as a mechanism for stimulating base of the pyramid social entrepreneurship.

Figure 1

This year’s Laureates are reframing market failures as opportunities for innovation at the edge of existing markets and conventional wisdom.

How Tech Laureates are Overcoming Market Failures

The Tech Laureates for 2008 are largely social entrepreneurs. They seek to maximize social outcomes as opposed to the wealth of shareholders or investors. Many operate in developing countries and most serve marginalized populations, including the poorest of the poor. They are masters of improvisation and their innovative solutions address essential human needs in a manner that is inspired by the need to overcome design constraints—from geographic isolation, to infrastructure, and limited capital access, to environmental and education constraints. These constraints require thinking in new ways about innovation and scale.

Aggregation and Modularity—the Paradox of Thinking Small to Serve Large Unmet Market Needs

There are 600,000 villages in India. By aggregating demand at the village level it is possible to create a market in instances where individual purchasing power is insufficient and high volumes are required to justify capital costs and reduce per unit output costs. In a sense, there is nothing new here. The historic antecedents of municipal water district funding in the United States followed a similar path to what we see in Indian villages today. What is unique in the context of Tech Laureate work in developing countries is the extent to which geographic aggregation is combined with local management and easily maintained systems to overcome skill shortages and the absence of national infrastructure and enable the deployment of market solutions on a much wider scale. In Lima, Peru, Practical Action has developed micro-hydropower plants to provide low-cost renewable electricity in poor mountain villages. These generation systems are designed for local management from construction to finance and facility maintenance. Modular, small scale design enables large scale replication across numerous villages. Sunlabob Renewable Energy in Laos has also used modular thinking and village level aggregation to create a solar charging market with sufficient scale to provide good livelihoods for local entrepreneurs. Similarly, Germany’s Vereinigte Werkstatten fur Pflanzenoltechnologie (VWP) has developed a decentralized sustainable oil seed plant cultivation process that yields both increased food production and low-pollution diesel fuel. With remote and developing communities as a target market, decentralization of plant seed cultivation can be seen as a mechanism for reducing dependency on global providers with price setting powers that are insensitive to local conditions. NComputing is another example of aggregation—in this instance the creative adaptation of client-server computing to make the cost of computers in the educational settings of developing countries affordable. The combination of computer hardware and virtualization software enables seven or more users to access the power of a single PC, with incremental seats costing only $70. The nComputer system is also optimized to draw little power—a critical consideration in environments with limited access to electricity. Here, as in the other examples, low-cost, easy to use modular solutions that can be locally maintained are a way of overcoming distribution hurdles due to infrastructure and civil engineering deficits—from water systems to energy and telecommunications.

IT-Enabled Platforms for Innovation in Education

Distance learning advocates in the United States have endured numerous criticisms, and the promise or hype of the Internet as a platform for delivering quality education has often exceeded the results achieved in practice. Ironically, the payoff of technology mediated or distance-based education may be greatest in settings where there is a paucity of educational resources or funding to support innovation—a classic case of substitution in the presence of human capital and financial constraints. The innovative education access tools utilized by this year’s Tech Laureates range from DVD lessons by high-quality teachers for urban slums in India (Digital Study Hall), to interactive Web sites for chronicling Arctic expeditions to classrooms (Aaron Doering, Learning Technologies). In the United States, arts education has suffered due to the shift of resources to focus on the results of standardized math and reading tests in conjunction with No Child Left Behind. In this context, the Center for Puppetry Arts has developed a model for delivering “best practice” arts lessons through interactive video-conferencing. More than 120,000 students have benefited from this service. Employing a more advanced information technology platform, Curriki has adopted the latest Web 2.0 social networking technologies to make available curriculum materials and facilitate curriculum-related interaction among primary and secondary schools. Similarly, the DAISY Consortium has created the Adaptive Multimedia Information System to overcome text and multimedia access barriers for impaired people in 16 member countries and 20 languages. Here, as with other 2008 Tech Laureates, information technology is an increasingly critical distribution channel for overcoming access to best practice educational resources and tools.

Low Cost Diagnostics as a Means of Mitigating Pandemic Risks

Early detection and remediation is critical to the control of pandemics. MedMira, Inc. of Halifax, Nova Scotia has developed an easy to use, point-of-care diagnostic test for HIV and hepatitis infections. Their modular technology can be used remotely by minimally trained technicians to diagnose and treat infected patients before their diseases can spread. In the case of HIV and hepatitis the reuse of syringes in poor countries is a significant risk factor in high levels of disease transmission. Star Syringe has developed a low cost auto disable syringe to mitigate this risk at the point of use. Yet another example of controlling variances close to their source—in this instance the spread of disease—can be found in the simple to use technology developed by DataDyne in Washington, D.C. They have designed PDA and cell-phone-based epidemiological data collection tools to effectively direct public health efforts and resources where they are most needed.

Second Generation Biofuels and Air Quality

While corn ethanol is a bust for food security, carbon emissions, and energy independence, there are a number of biofuels that are economically and environmentally sustainable in many rural parts of the world. For example, biomass gasification is being used to support the energy needs of village enterprises in the State of Bihar, India (Decentralized Energy Systems, DESI Power), and biogas and vermicompost technologies are being used to power 50,000 biogas plants in India. In the latter instance, SKG’s plants have reduced deforestation, indoor air pollution associated with the use of kerosene, and greenhouse gas emissions while increasing incomes of the poor. Similarly, invasive thornbush plants that have endangered the habitat of African cheetahs are being used by the Cheetah Conservation Fund as an efficient biofuel that is virtually smokeless. Finally, the Pesticide Action Network of North America’s Drift Catcher technology is an affordable air monitoring system for use in communities exposed to hazardous pesticides and other air quality concerns.

One of the critical and urgent challenges in developing countries relates to the need to simultaneously increase food security while reducing the adverse impact of chemical fertilizers on water quality. Arcadia Biosciences has developed a Nitrogen Use Efficiency (NUE) technology that reduces the nitrogen fertilizer requirements of crops by up to two-thirds without sacrificing yields. This technology increases the nitrogen absorption of plants while at the same time reducing both water and air quality pollution in agriculture. Elsewhere, OneWorld, South Asia has combined British Telecom and Cisco equipment to provide poor farmers with audio-based answers to their questions on agricultural productivity and health questions. Since the majority of the world’s poor are in rural areas, increasing the productivity of agriculture is essential to the elimination of extreme poverty. Two examples from this year’s Tech Laureates illustrate the potential for mechanization to increase agricultural productivity and incomes of the rural poor. The Fonio De-Husker automates the removal of hulls from fonio, a highly nutritional crop indigenous to West Africa. With the right business model to manufacture, distribute and service this technological innovation, it could provide significant and widespread health and economic benefits. Similarly, the Universal Nut Sheller, if manufactured at scale, can significantly increase incomes from crops by eliminating the tedious hand labor of women and children. In the case of dried coffee beans, for example, this technology can shell a 50 kilogram bag of dried coffee beans in 25 minutes, increasing the value of raw coffee beans ten-fold. Here, as elsewhere, the key to realizing the potential of innovation is in getting to scale.

Combining Local Materials with Global Best Practices for Safe, Affordable Housing

In Egypt, Appropriate Development Architecture and Planning Technologies provides youth livelihood opportunities by using cold-pressed bricks composed of local waste materials such as rice straw and cement dust to create building materials that are immune from the prices set by world markets for construction materials. These materials and construction processes have been widely adopted in Egypt and Algeria. Local materials, in combination with best practices used elsewhere, can combine low cost with earthquake safety. Confined masonry and timber construction techniques developed by Build Change and diffused through partner organizations and builders in Indonesia and Western Sumatra have introduced affordable earthquake safety techniques in the post-disaster rebuilding programs of earthquake prone regions of the world. In producing safe, affordable housing, as in other illustrations of creative capitalism, there is a need to “connect the dots” so that innovators from around the world can learn from each other and pursue “combinatory approaches” to innovation.

Can Scalable Business Models Expand the Impact of Tech Laureates?

This year’s Tech Laureates are leveraging scarce resources to develop solutions to social and environmental crises. They are creating value that greatly exceeds the cost of the technology solutions they are providing. In conventional markets where surplus value is created, the economic buyers, those with the motivation and means to pay, are users or customers. How do we identify or create these economic buyers where the users are poor? How do we develop the incentives that are needed to ensure that solutions that serve the unmet needs of the poor are taken to scale? Can solutions that produce social and environmental benefits become financially sustainable? Can they grow to a level of impact that is commensurate with the substantial and often critically urgent needs that exist in our world? How can we unleash the force of what Bill Gates describes as creative capitalism? If social entrepreneurs are to become a driving force in regional economic development, environmental sustainability, and addressing social inequities, they will need access to best practices in achieving both social outcomes and financial sustainability at scale. It is these needs that Santa Clara University’s Global Social Benefit Incubator addresses.

The Global Social Benefit Incubator

The GSBI is a capacity building program that provides social entrepreneurs with the knowledge, skills, and network resources that they need to have a measurable and financially sustainable impact on poverty or other social and environmental outcomes. There are four key elements in the GSBI approach to developing sustainable social ventures:

Selection of scalable social ventures with initial vetting through world class programs like The Tech Awards.

An advanced two week in-residence education program complemented by facilitated pre- and post program distance learning

A seasoned cohort of experienced Silicon Valley entrepreneurial executive mentors to provide selected organizations with on-going support and advice.

A distance based collaboration platform to enable alumni to capture network externalities and the peer-to-peer learning that stems from “connecting the dots” across a geographically fragmented landscape to combine innovation solutions from around the world.

The primary output of the GSBI is a financially scalable social venture that is capable of attracting funding. The GSBI program focuses on some of the same issues that underlie market failure: how to develop deeper insight into the needs of underserved markets; how to address inequities as business problems to be solved through technological, process, and business model innovations; how to address the challenges of pricing, affordability, and distribution; how to align corporate, government, and NGO partners with a common social mission; how to develop “economic buyers” and overcome innovation barriers; and, how to achieve financial sustainability at scale. Many of the past Tech Laureates who have attended the GSBI learn that a primary factor that separates them from the wider impact that they seek to have is a business model that specifies a path to financial sustainability. Others recognize that there are critical missing elements in their solution that undermine sustainability. Still others gain an appreciation of previously unexamined pricing and distribution or partner alternatives. And, some will identify organizational processes or leadership issues that are essential to scaling up. All GSBI graduates leave with a business plan that has been rigorously critiqued by seasoned Silicon Valley mentors and expert reviewers. In for-profit incubators, ten percent of ventures scale and an additional thirty percent will manage to survive, while sixty percent will fail. With its focus on scaling, the GSBI targets a scaling success rate that is three times greater than that of for profit incubators. The impact of the GSBI goes beyond this outcome to include the social impact outcome metrics of alumni organizations. In the six year history of the GSBI, more than 80 percent of alumni are still working in their social ventures. More than thirty percent of all alumni are scaling as measured by growth in beneficiaries served with a positive cash flow, and an additional 45 percent are sustaining, half of which are experiencing beneficiary growth albeit with variable or unpredictable cash flows. The ratio of alumni that are scaling currently stands at more than three times the success rate in conventional for-profit incubators. While the GSBI remains a work in progress, it is a strong program that has attracted some of the leading social entrepreneurs in the world, spawned the development of “what works” teaching cases, and linked some of Silicon Valley’s leading executive and educational resources to the capacity development needs of social entrepreneurs around the world. In the course of this ongoing learning laboratory we have learned a great deal about how to overcome market failures and, through the inspiration of social entrepreneurs, create a more just and equitable world. While a useful roadmap exists to guide the next stages of GSBI development, much remains to be learned on the journey ahead. This year’s Tech Laureates will be useful path finders and, hopefully, the GSBI will continue to accelerate the growth of their capacity to serve others. (For more information about the GSBI and how to apply, go to www.scu.edu/sts/gsbi.)